Provisions to provide incentives for start-up must be simple, clear and liberal- even the proposal in Finance Bill 2020 will not serve intended purposes.

[CA DEV KUMAR KOTHARI]

Summary:

Any provision for incentive should be in simple and clear language ,must be workable in  ground realities and easy to implement. Incentive for start-up is not very simple and effective. In short life of the provision it has seen several amendments and there are proposals for further amendments, with a view to rationalize. Author  has also mentioned some suggestions for making the provision more meaning full and result oriented. 

Incentives should be simple, clear and liberal:

Any fiscal incentive should be provided in simple and clear language, without ambiguity and must be liberal enough so that purpose of the incentive is achieved. However, unfortunately we find most of provisions which permit some incentives are very difficultly worded and conditions prescribed are also difficult. Even small deduction allowed for medical insurance are difficult to interpret and comply with. Deduction allowed for start-up is also no exception. This is also very difficult to understand and achieve.

When an incentive provision is not clear and easy, and are beyond ground realities,  it is likely that intended purpose in not achieved by benefitting intended beneficiaries rather the provision can be misused by clever people in improper manner and not in accordance with intention of the incentive.

Start-up:

As per general understanding, publicity, announcements etc.  and theme of start-up, it is understood as a new business newly started by new entrepreneur. It is to provide self- employment to youth who will also provide employment to others. This is also evident from the provision of Section 80-IAC which was inserted vide the FA 2016 and is effective from 01.04.2017 and is applicable to a company or LLP incorporated on or after 01.04.2016 and before 01.04.2021 subject to compliance of other eligibility criterion and compliances.

Individual and proprietary firms should be allowed:

Considering the theme of start-up, an individual carrying business in personal name or a proprietary concern should be allowed as a start-up. This will really help youth of India to develop entrepreneurship. The conditions presently applicable are such that one has to meet and overcome several hurdles and comply with severe conditions, and any lacking can cause hardship to the start-up and incentive may not be allowed.

Section 80 IAC falls under part C of  chapter VIA

This part is for Deductions in respect of certain incomes. The nature of start-up envisaged are such that earning of income is not certain, there can be losses also. Therefore, for providing incentive to start-up in real sense, the incentive should be based on payments , investments, and job creations and not based on profits.

Uncertain profitability is a ground reality of any business, and particularly in new business of types which are considered for promotion.   This fact is duly considered in the provision as it provides for exemption for income of any three consecutive years out of seven years. ( it was initially three consecutive  years out of  five  years which was revised to out of  seven years and  now there is  proposal  to  revised  it  any three consecutive years out of ten years).

The amendments proposed:

Amendment proposed are with a view to rationalize the provisions. However, in fact these are to extend some more relaxation.  The proposals are to increase overall period from seven year to ten years during which benefit can be claimed for any three consecutive years and other proposal is to increase limit of turnover from ₹ 25 crore to ₹ 100 Crore for the year for which deduction is claimed.  

The history of amendment and present proposals shows that provision are not made with understanding of ground realities and are made in expectation of very high returns for start-ups – for wealth creation and job creation.

Some suggestions for more effective deduction:

Deduction should also be allowed to individuals, and proprietary concerns. For example, we find even  some students of engineering courses , who are working as a team of classmates and are able to develop new products , processes, and e-tools by application and improvement of software and are able to export I-enabled services including software, apps, and providing maintenance and consultancy services  and are earning foreign exchange for the country. Such students having quality of entrepreneurship and team building who are getting self-employed and helping others to get work and earn should also be eligible for deduction.

The deduction should be for any three years and not consecutive three years. This is because it is very difficult to achieve profitability in three consecutive years due to various reasons. There can be decline in profitability in just next year due to lack of demand of products or due to intensity of competition. In case of short cycle of trade profitability maintaining profits consecutively for three years may be difficult.

If the condition of three consecutive years is applied, it can be misused just to avail deduction.

There should not be limit on amount of turnover for the year in which deduction is claimed, chances of profits is more when there is higher turnover. Before certain limit of turnover (called break-even point), there cannot be profit due to high fixed costs.

 Provision:

Provisions of section are reproduced with highlights of catchwords, underlining   added for ease in understanding and analysis.

Proposed amendments are also indicated.

 

¹[Special provision in respect of specified business.

‘80-IAC. (1) Where the gross total income of an assessee, being an eligible start-up, includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent. of the profits and gains derived from such business for three consecutive assessment years.

(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any three consecutive assessment years out of ²[ seven years ]  {ten years} beginning from the year in which the eligible start-up is incorporated.

(3) This section applies to a start-up which fulfils the following conditions, namely:-

(i) it is not formed by splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of a start-up which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred to in section 33B, in the circumstances and within the period specified in that section;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Explanation 1.- For the purposes of this clause, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if all the following conditions are fulfilled, namely:-

(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

(b) such machinery or plant is imported into India;

(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

Explanation 2.-Where in the case of a start-up, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent. of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.

(4) The provisions of sub-section (5) and sub-sections (7) to (11) of section 80-IA shall apply to the start-ups for the purpose of allowing deductions under sub-section (1).

Explanation.-For the purposes of this section,-

³[(i) “eligible business” means a business carried out by an eligible start up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation;]

(ii) “eligible start-up” means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions, namely:-

(a) it is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, ⁴[2021];

(b) the total turnover of its business does not exceed twenty-five crore rupees {one hundred crore  see note  6}  ⁵[in the previous year relevant to the assessment year for which deduction under sub-section (1) is claimed];

(c) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government; and

(iii) ‘‘limited liability partnership’’ means a partnership referred to in clause (n) of sub-section (1) of section (2) of the Limited Liability Partnership Act, 2008. (6 of 2009.)]

 

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Notes:-

1.	Inserted vide THE FINANCE ACT, 2016  w.e.f. 1st day of April, 2017.
2.	Substituted vide  THE FINANCE ACT, 2017 w.e.f. 1st day of April, 2018 before it was read as, “five years” now proposed to be revised to ten years.
3.	Substituted vide THE FINANCE ACT, 2018, before it was read as, "(i) “eligible business” means a business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property;"
4.	Substituted vide THE FINANCE ACT, 2018, before it was read as, "2019"
5.	Substituted vide THE FINANCE ACT, 2018, before it was read as, "in any of the previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day of March, 2021"
6.	Proposed to be revised to 100 crore  vide FB 2020

 

Budget proposals in FB 2020, notes and memorandum explaninig proposals are reproduced below with highlights added:

Amendment of section 80-IAC.

36. In section 80-IAC of the Income-tax Act, with effect from the 1st day of April, 2021,––

(i) in sub-section (2), for the word “seven”, the word “ten” shall be substituted;

(ii) in the Explanation, in clause (ii), in sub-clause (b), for the word “twenty-five”, the words “one hundred” shall be substituted.

 

Notes on Clauses:

Clause 36 of the Bill seeks to amend section 80-IAC of the Income-tax Act relating to special provision in respect of specified business.

The provisions of section 80-IAC, inter alia, provide for a deduction of an amount equal to hundred per cent. of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of seven years at the option of the assessee and the total turnover of its business does not exceed twenty-five crore rupees in the previous year relevant to the assessment year for which deduction under this section is claimed.

It is proposed to amend the said section so as to provide that the deduction under the said section shall be available to an eligible start-up for a period of three consecutive assessment years out of ten years beginning from the year in which the eligible start-up is incorporated and the total turnover of its business does not exceed one hundred crore rupees in the previous year relevant to the assessment year for which deduction under this section is claimed.

This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

From memorandum explaining proposals:

Rationalization of provisions of start-ups.

The existing provisions of section 80-IAC of the Act provide for  a deduction of an amount equal to one hundred per cent of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of  seven years, at the option of the assessee, subject to the condition that the eligible start-up is incorporated on or after  1st April, 2016 but before 1st April, 2021 and  the total turnover of its business does not exceed twenty-five crore rupees. 

In order to further rationalise the provisions relating to start-ups, it is proposed to amend section 80-IAC of the Act so as to provide that- 

(i)  the deduction under the said section 80-IAC shall be available to an eligible start-up for a period of three consecutive assessment years out of ten years beginning from the year in which it is incorporated;

 (ii)  the deduction under the said section shall be available to an eligible start-up, if the total turnover of its business does not exceed one hundred crore rupees in any of the previous years beginning from the year in which it is incorporated.

This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year  2021-22 and subsequent assessment years. 

[Clause  36]

Conclusions:

As discussed above the provision has already seen several amendments in its short life. Still the provision is not simple and is not likely to achieve its purpose. The provision is not based on ground realities and understanding of business to which it is intended to benefit. Involvement of government agencies will make it difficult. The conditions which are imposed are such which can be achieved with difficult and that too only by organises and large organisation. The provision should be simple, liberal and easy to implement.